Renewed fears over the debt situation in the major PIIGS economies of Spain and Italy is rocking European markets once again. Concerns are growing in Spain over the ability of the ruling party to enact harsher austerity measures given the Socialists crushing defeat over the weekend in regional and local elections. “The dismal election results for the ruling Socialists will hamper the government’s ability to reinforce its deficit-reduction plan,” said Raj Badiani, an economist at IHS Global Insight in London. Meanwhile, Italy saw S&P lower its outlook for Italian bonds from stable to negative, citing weak growth prospects and a lack of economic reform, calling into question the fiscal health of two of Europe’s trillion dollar economies. As a result, the region’s common currency plunged by about one cent to the $1.40 level against the U.S. dollar and the lowest all-time level against the Swiss franc.
Although these massive economies are experiencing severe weakness, Germany has managed to chug along anyway. Despite its close proximity to the region and its sheer dominance over the Euro zone, Germany has emerged relatively unscathed from this disaster, at least so far. The export powerhouse has managed to reap the benefits of the weaker currency while at the same time avoiding a great deal of inflation, allowing the German economy to grow despite disaster elsewhere. However, with heavy German bank exposure to the Mediterranean region– $330.4 billion by some estimates– some are growing increasingly gloomy over the central European country’s ability to stave off disaster in its own economy as well. Fortunately, a series of data releases due out of the nation later today should help to shed some much needed light on the status and outlook of one of the world’s most important economies [use the Country Exposure Tool to find which ETFs have exposure to certain countries].
Later today, Germany will be releasing important figures regarding quarter-over-quarter GDP growth as well as a report on the ifo Business Climate Index which helps to determine the business sentiment and conditions in the euro-zone. German GDP growth is expected to come in at 1.5%, equal to the previous quarter’s growth representing a solid level of economic expansion for Europe’s manufacturing heart. However, while the GDP numbers look to be solid, the business sentiment could be declining; analysts expect the ifo to fall to 110.1 from the previous reading of 110.4. While this is only a modest decrease, investors should be aware that German Business Expectations, which is a subset of the ifo index, looks to fall from 104.7 down to 104.0, potentially signalling that investors are growing increasingly worried over the future economic picture in Germany and in Europe as a whole [see all the ETFs in the Developed Europe region].
Due to these important data releases, as well as continued concern over the European debt situation, look for the Market Vectors Germany Small-Cap ETF (GERJ) to be in focus throughout today’s session. The relatively new fund from Van Eck tracks an index of companies that are classified as small caps and that generate at least 50% of their revenues in Germany or domiciled in the country. As a result, this fund may offer more of a ‘pure play’ on the German economic situation than a large cap fund that has a great deal of multinational companies which do business not just in Germany but across Europe and the World as well. Should the German data be able to surprise on the upside and make investors forget about the troubled PIIGS markets, GERJ could snap back to strong gains in Tuesday trading. However, if one of the strongest nations in the euro zone shows weakness as well it could send broad European markets lower and spell further doom for this small cap fund [also see ETF Insider: Buying Opportunities After Panic Selling].
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Disclosure: No positions at time of writing.